Bonds - A Worthwhile Investment?

Should you invest in bonds? Short answer: not right now. Long answer: bonds seems attractive. Bonds issued by a government, or a high-quality, well-performing corporation are quite secure and provide guaranteed cash flow. However, bond prices (their value) falls when interest rates rise. Why, you ask? Because if you own a bond that pays 3% interest, then rates rise to 4%, people will not want to buy your bond at face value (the amount you paid for it when it was issued) because they can now get new bonds that pay higher interest. If you invested $100 in a bond at 3% interest, you get $3 per year. New bonds now pay $4 per year interest on that same $100 investment. So, in order to get people to buy your bond (assuming you want to sell it), you have to sell it at a discount. In this example, you'd have to sell it for $75 ( 3/75 = 4%), since at that price level, investors would be getting the same 4% return as if they'd bought one of the new bonds. And as we're currently in an environment where interest rates are at an all-time low, they can only go up. So bonds can only perform worse than they have been lately.

All this being said, bonds can be used to stabilize a portfolio. Assuming you hold a bond to maturity, you have a (nearly) guaranteed set of cash flows and principal. You may only get 3% interest on it, but you're sure to get this 3% per year and recoup your investment when the bond matures (assuming its a government bond or high-quality corporate bond). Less risk = less investment return.

I personally wouldn't be investing in bonds right now, unless you can get a high-quality bond that pays 5% or more per year, and you intend to hold it until it matures.